Liquid Network Bitcoin Sidechain Halted After $320M Exploit

Liquid Network, a Bitcoin sidechain used by exchanges for faster settlement, has suspended operations after around 4,000 BTC (about $320 million) was withdrawn from its federated custody wallet. The people responsible have identified themselves as white-hat researchers and say they intend to return the funds once the underlying flaw is fixed, communicating with the Blockstream team via on-chain messages.

Unlike many recent crypto incidents, this was not caused by stolen credentials or a compromised private key. Instead, attackers exploited a vulnerability in Elements, the open-source software that underpins Liquid, which allowed the creation of Bitcoin-pegged tokens without proper backing. These improperly created assets were then moved out through SideSwap, a legitimate trading interface built on the network.

The incident has raised serious questions about the security of federated custody models, where more than 80 exchanges, infrastructure providers and institutional firms jointly hold reserves. With nearly the entire reserve pool affected, the case highlights how a single code-level flaw can undermine trust across an entire multi-party financial network.